MARKET WATCH: Oil prices make strong rally

“The time spread in Brent also recovered from a sharp sell-off the day before but gave back some of the gains this morning as demand is still tamed by weak refinery demand,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Petroleum products were stronger as were their time spreads following news that an increasing number of refineries is going into planned maintenance or otherwise reducing runs due to poor margins.

However, analysts in the Houston office of Raymond James & Associates Inc. reported, “Concerns over rising commodity prices and the possibility that the Federal Reserve Bank may take the ‘punch bowl’ away has brought some added skeptics to the market's bullish run.” They noted the volatility index (VIX) is at its lowest level in 5 years, “lending itself to intensifying debate over whether the bullish run will continue or, as some skeptics' believe, that a correction is on the horizon.”

Zhang said, “China is set to increase domestic retail prices for gasoline and diesel again, as international benchmark oil prices continue to climb. This could stimulate some incremental demand from domestic refiners, but it will add to inflation pressure and curb oil demand growth in the medium term. Meanwhile, Asia’s fuel oil cracks appeared to have bottomed as refineries go into maintenance season and relatively more expensive heavy crude also reduces fuel oil supply.”

Geopolitical risk continues to threaten a possible price spike in crude. “It is worth noting that implied volatility declined further last week, which continues to pose a good producer hedging opportunity,” said Zhang.

In a White House meeting last week, President Barack Obama raised the possibility of releasing strategic petroleum reserves in a meeting with British Prime Minister David Cameron (OGJ Online, Mar. 16, 2012).

“The consideration of a strategic reserve release is another bow in the armor the US is searching for to maintain pressure on Iran,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “The US and the European Union have imposed punishing sanctions against Iran’s banking and energy sectors to pressure it to abandon its uranium enrichment program.”

Iranian sanctions

In an unprecedented step, the Society for Worldwide Interbank Financial Telecommunication—the global group that handles banking transactions—announced last week it will discontinue communications services to Iranian financial institutions subject to European sanctions, effectively preventing the flow of money in and out of Iran. “This latest announcement coincides with news that many UAE financial institutions have stopped handling Iranian Rials over the past few weeks, placing further difficulties on Iran to trade and to acquire hard currency,” KBC analysts reported.

China and India have said they will continue to take Iranian crude oil, although US administration officials last week indicated this could lead to sanctions against India if Iranian crude purchases are not reduced. “A decision to levy penalties under a new US law restricting payments for Iranian oil could be enforced as early as June 28,” said KBC analysts. “Indian officials are reported to have indicated planned reductions are expected when new contracts are renewed in April; however government ministers have been vocal in their support of continued purchase of Iranian crude oil to support the country’s growing energy requirements.”

They said, “Oil markets are at the point of a delicate balancing act” between political requirements for sanctions on Iran and the need to balance global oil supplies until the traditional second quarter reduced demand period. KBC’s demand forecast is for a 1.6 million b/d decline in global demand in the second quarter, easing pressure on supply prior to demand increases in the third and fourth quarters of 2012.

“Although much commentary has been made on crude prices being supported by a forecast in US economic demand growth, our ongoing market analysis of US oil demand shows a significant fall [compared with] the first quarter of 2011,” KBC analysts said. They are forecasting a 4.57% decline (872,000 b/d) in total US first quarter demand compared with the same period in 2011. Leading the way in absolute volume terms is a forecast decline in US gasoline demand of 356,000 b/d (4.1% decline), closely followed by diesel with a decline of 287,000 b/d (7.3%) in first quarter 2012 compared with a year ago, they said.

Production from the Organization of Petroleum Exporting Countries continues at high levels, apparently “on track to come in at a level of 31.2 million b/d during March, 1.2 million b/d above the ‘voluntary production roof,’” KBC reported. “As usual, when supply is high from OPEC, the lead has been taken by Saudi Arabia, which is producing about 9.85 million b/d. Kuwait and the UAE have supported additional production, with the trio drawing some Iranian ire over their promises to make up any Iranian oil supply shortfalls in the coming months.” However, Middle East rhetoric has mellowed since Mar. 1 parliamentary elections in Iran and its offer to renew negotiations with the West over its nuclear program.

Meanwhile, KBC analysts said, “Rumors of Iranian production already falling and floating storage building still remain largely unsubstantiated and might be caused by the changed patterns of Iran’s use of its own tankers, as fewer international shippers remain ready to serve Iranian routes.” KBC expects OPEC’s spare capacity will rise this year from the first quarter level of 2.62 million b/d to 3.14 million b/d in the fourth quarter.

Energy prices

The April contract for benchmark US light, sweet crudes increased $1.95 to $107.06/bbl Mar. 16 on the New York Mercantile Exchange. The May contract gained $1.93 to $107.58/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.95 to $107.06/bbl.

Heating oil for April delivery rose 5.94¢ to $3.28/gal on NYMEX. Reformulated stock for oxygenate blending for the same month climbed 6.84¢ to $3.36/gal.

The April natural gas contract was up 4.7¢ to $2.33/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., lost 1.5¢ to $2.06/MMbtu.

In London, the May IPE contract for North Sea Brent jumped $3.21 to $125.81/bbl. Gas oil for April increased $11.75 to $1.035.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dipped 11¢ to $122.92/bbl. So far this year, OPEC’s basket price has averaged $116.52/bbl.